How Katrina Will Pinch Pocketbooks

Paralyzed by putrid floodwater, insolvent infrastructure and no manpower, the Gulf Coast is months, perhaps years, away from reassuming its role at the center of the American economy.

And Katrina’s wrath will do more than bring suffering to millions of Gulf Coast residents: It will smack all Americans in the coming weeks and months. Like 9/11, this hurricane will be recorded as a milestone calamity in American history.

Cost estimates for Katrina vary, yet few doubt it will be the most expensive natural disaster in American history. Insurance claims could top $40 billion. Many analysts expect total economic losses to exceed $150 billion.

Within days of the catastrophe, all Americans started to feel Katrina’s fury, most notably in the pre-Labor Day weekend hike at the gas pump. As a result of closed pipelines, gas prices in some southern states ran between $6 and $8 a gallon, while the rest of the country had to contend with hikes of 40 to 70 cents a gallon. Natural gas prices also soared and will likely remain high as the U.S. heads into winter.

In spite of the headlines, surging oil and natural gas prices aren’t the worst problems the U.S. will face in coming weeks and months.

Hurricane Katrina struck an overwhelming blow to the foundation of the national economy. As America’s largest port in terms of tonnage and the fifth largest in the world, the Port of South Louisiana was the funnel of the American economy. With this out of commission—or even operating at less than full capacity—the repercussions will be felt far and wide. In addition, disruption of transportation and agricultural production will pinch pocketbooks across the nation.

The price of some foods is sure to increase throughout America. Forty percent of the nation’s oysters were harvested in Louisiana. Sugar, coffee, fruits and vegetables from Central and South America were imported through Gulf state port systems. Compounding the problem is the fact that sizeable portions of Mississippi’s sugar cane and cotton crops were decimated just weeks before they were due to be harvested.

Katrina virtually cut off companies and lines of transportation supplying the nation. The Gulf area hit was a chokepoint—a network of ports, rail lines, barge traffic and major highways.

This put a tremendous strain on the trucking industry, which provides 80 percent of Americans with the freight they consume, according to Bill Graves, president and CEO of the American Trucking Associations. Katrina brought trucking “to a near grinding halt” in the regions hit by Katrina (Fleet Owner, September 13).

Trucking was already taking a financial blow from the rising cost of fuel. This year, the industry is expected to spend $85 billion on fuel—a $23 billion increase over last year. And, said Graves, “Ultimately, rising fuel prices have the potential to increase the cost of everything that is moved by truck” (ibid.).

The hurricane also created a huge bottleneck for farmers—wiping out places to ship or store their crops. And many of these farmers have not even hit their peak harvest yet.

The damage to ports and shipping channels, as well as the barges that went missing, all contributed to increase shipping costs. Trains are up to five times more expensive for shipping goods—not to mention that Katrina halted three major rail carriers in the port area.

The Mississippi River is the cheapest shipping route for many exports. America exports a quarter of the grain it produces, and half of that goes through the Mississippi ports struck by Katrina. Alternative ports simply aren’t equipped to handle these types of exports. “If this is a week-long problem, it’s probably not too damaging,” said J.B. Penn, undersecretary of agriculture for farm and foreign agricultural services. “But if it’s much longer, then it’s a real problem” (Washington Post, September 1).

Many analysts believe Katrina will slow America’s recent economic growth and aggravate its deepening financial problems such as its unprecedented trade deficit. Forecasts for fourth-quarter economic growth dropped from 3.5 percent on an annualized basis to 2.5 percent, and some economists speculate that the lowered rate will likely remain throughout 2006.

Along with the thousands of homes, Katrina destroyed the infrastructure and facilities of thousands of companies. It is estimated that the storm destroyed half a million jobs in New Orleans and other Gulf Coast areas. “Hurricane Katrina, by forcing an exodus of workers and families from New Orleans and surrounding areas, appears likely to rank alongside Sept. 11, 2001, and the Arab oil embargo of 1973 as one of the nation’s most serious and sudden economic shocks—particularly in terms of job losses—in recent memory” (Washington Post, September 3).

Virtually every facet of the American economy has been impacted. Agriculture, imports, exports, transport, oil and gas, manufacturing and retail sectors are all suffering. High energy prices, which were further exacerbated by Katrina, have driven many to tighten their budgets, an ominous sign for retailers who rely on the traditionally robust fall and winter holiday season.

The price of lumber and construction materials began to rise within days of the hurricane and continues to increase in areas of high demand. This will drive up the cost of building new homes across the nation, perhaps putting a chill on the nation’s “hot” housing market, which is presently the motor of the American economy. Katrina struck at a bad time, when many in real estate believe America’s housing market is already beginning to wane.

While the economic impact is absorbed by all Americans, Louisiana, Mississippi and Alabama will continue to feel the brunt of the hurricane’s blow. Of particular concern is the government’s ability to rebuild and repair New Orleans and its surrounding infrastructure.

Discussing this concern, Dr. George Friedman stated, “[I]t is not the population that is trapped in New Orleans that is of geopolitical significance: It is the population that has left and has nowhere to return to. The oil fields, pipelines and ports required a skilled workforce in order to operate. That workforce requires homes. They require stores to buy food and other supplies. Hospitals and doctors. Schools for their children. In other words, in order to operate the facilities critical to the United States, you need a workforce to do it—and that workforce is gone” (Stratfor, September 1).

New Orleans and its surrounding infrastructure are essential to the American economy and must be rebuilt, at least to a certain extent, but at what cost? Before building anything, the government will have to spend hundreds of millions of dollars cleaning up the mess. Soil and water in and around New Orleans—deeply contaminated with oil, chemicals and human feces—require detoxification. Additional money will have to go toward enticing contractors and construction companies back into the area; facilities to service their needs must be built first.

As federal and state governments allocate billions of dollars to reconstructing the Gulf Coast infrastructure, watch for foreign companies to seek a piece of the pie. China, for example, could seek involvement in rebuilding port facilities to add to its collection of port interests around the world. While support from foreign nations will be appreciated, this catastrophe might well provide an avenue by which China and other nations can gain an influential foothold at the center of America’s key industries.

Even after the complete reconstruction of critical infrastructure, Louisiana, Mississippi and Alabama will have to undertake an extensive and expensive public relations program in order to entice a labor force back to the region. Tens of thousands of trained people will be required.

Will they be available? Thousands of evacuees have stated that they will not return; many thousands will likely take their insurance payout and relocate to another state. This trend could be devastating for these states—and a wound to the entire United States.

Even if and when the Big Easy lives again, the city and its environs will remain susceptible to another such catastrophe.

“[S]cientists who study such storms and the way society reacts to them say that more dangerous storms could be on the way, and that they are likely to come more often than many people expect,” said the August 30 issue of Forbes. Roger Pielke Jr., director of the Center for Science, Technology and Policy Research at the University of Colorado, was quoted as saying, “We haven’t seen the worst-case scenario by any stretch of the imagination.”

In fact, the distinct possibility looms that another hurricane could strike the southern states this year.

How many more Katrinas can the U.S. economy handle? This one struck a bone-jarring blow. The federal government has already spent billions and will spend billions more. A number of state governments (particularly in the south) are buckling under the pressure of the hurricane’s residual costs. Katrina compounded the already crippling debt burden suffered by America as a whole.

“The financial ripples of Katrina will be massive. … This virtually guarantees that the federal budget deficit will balloon again,” stated the British Independent newspaper. After predicting in July that this year’s fiscal 2005 deficit would drop to $333 billion, the government’s hopes were dashed by Katrina. “Next year’s deficit is likely to far exceed the $341 billion predicted two months ago …” (September 8).

It is difficult to comprehend the true extent of the economic impact Katrina will ultimately have on America. With interest rates on the rise and gas prices already climbing to record heights, this was the last thing the U.S. economy needed.